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7/29/02


 

WALL STREET TREACHERY

Part Three: IMPECCABLE TASTE

By David Podvin

Entry: fraud
Pronunciation: 'frod
1: DECEIT, TRICKERY; intentional perversion of truth in order to induce another to part with something of value; an act of deceiving or misrepresenting: TRICK

Corporate America claims that it is in compliance with federal law when it manipulates and manufactures earnings to con investors into buying stock. In many cases, the manipulation is technically legal. In all cases, it is dishonest and done with the sole intention of defrauding the public. The result has been a recent loss of confidence on the part of the average citizen in the integrity of the corporate elite. And with good reason.

On July 17, 2002, International Business Machines reported the following gobbledygook to its shareholders:

“Earnings per share were 3 cents, including 81 cents a share in charges associated with selling its hard-drive business and workforce reductions. Second-quarter net income for all operations was $56 million, including $1.4 billion in incremental charges -- $2.1 billion before tax -- compared with $2 billion in net income in the second quarter of 2001. Total revenue for the second quarter was $20 billion, which includes $379 million of revenue from the hard-drive unit, a 7% decrease from the second quarter of 2001.” SOURCE: CNBC

One of America’s most respected companies stated with a straight face that revenue from its hard-drive unit counts, but the charges for selling the hard-drive business do not count. When IBM received money, it was added to earnings. When IBM spent money, it was not subtracted from earnings.

This outrageous attempt to mislead investors is legal. It is also accounting fraud, defining that term as “employing accounting tricks for the purpose of fooling people into buying stock that they would avoid if presented with the straightforward truth”. It is the cynical and deceptive use of financial sleight of hand to deceive investors. It is the major reason the market skyrocketed during the nineties. It is the major reason the market has been falling for the last two and a half years. The deceit has lost its charm.

Cisco Systems reported a slight profit, unless you included all of the company’s costs of doing business, which Cisco didn’t, because that would have resulted in a huge loss.

Motorola enthusiastically announced a “return to profitability”, unless you included the impact of “special items”, such as all expenses incurred, which Motorola didn’t, because that would have meant a loss of over two billion dollars.

Yahoo! reported better than expected earnings and the stock rose. Had Yahoo! included the total cost of paying its executives, the company would have had to report a big loss, in which case the stock would not have risen. So Yahoo! did not include the total cost of paying its executives.

PIMCO, which is the world’s largest bond trading firm, now refuses to buy the bonds of General Electric out of concern that GE is meeting its earnings goals by having its accountants accentuate the positive and de-emphasize the negative.

IBM and General Motors and Ford included as profits the paper gains on stocks held in the companies’ pension funds. These corporations did not include their outstanding pension fund liabilities, which far outstripped the paper gains. This accounting technique created the mirage that the pension funds are profit producers when they are actually multi-billion dollar profit reducers.

The fancy footwork is all done for a logical reason. The reason is greed. At every one of the above-mentioned firms, insiders quietly sold large quantities of stock while their companies were loudly proclaiming that the future looked great. There is always a time of reckoning when the truth about the financial status of the corporation must finally be acknowledged, but that fateful day comes long after executives have already cashed in.

In March of 2000, insiders at Cisco Systems sold stock when shares moved above $80 per share. At the same time, Cisco President and CEO John Chambers was telling investors that much better times were immediately ahead for the company. The stock reached an all time high of $82, and has since fallen below $12. Chambers has only recently acknowledged that Cisco is having “some problems”. When those in the know are selling at the top while enthusiastically encouraging the uninformed masses to buy their stock from them, it is the essence of fraud.

At Enron, executives bailed out of their stock immediately before bad news sent the shares plummeting.

At WorldCom, executives bailed out of their stock immediately before bad news sent the shares plummeting.

At Tyco, executives bailed out of their stock immediately before bad news sent the shares plummeting.

At Apple, executives bailed out of their stock immediately before bad news sent the shares plummeting.

At Boeing, executives bailed out of their stock immediately before bad news sent the shares plummeting.

And if this were an encyclopedia instead of an article, there would be ample room to identify all of the other companies that have pulled exactly the same scam.

Corporate executives see absolutely nothing wrong with stealing from shareholders because they believe the companies that they run exist to be plundered. As recently reported in the New York Post, Commerce Bancorp of New Jersey has revealed that Shirley Hill received $2.3 million last year for "interior design, facilities management and general contractor services". Intrigued by the listing of a multi-million dollar budget entry that began with the words “interior design”, I called the shareholder services division of Commerce Bancorp to request an explanation of this expenditure. I was told that the payout is adamantly defended by Ms. Hill’s husband - Commerce Bancorp Chairman, President, and CEO Vernon Hill II. He insists the deal is a bargain for shareholders because his wife has “impeccable taste”. Mr. Hill also defends the $309,000 that Commerce paid to Galloway National Golf Club, in which he is the principal equity holder. He also defends the lucrative leases paid by the bank on twenty of its branches to a limited partnership controlled by someone named Vernon Hill II.

Conservative social activists demand that a truly moral society requires a return to the shaming of out-of-wedlock children as “bastards”. In reality, the bastards in need of shaming are the conservative business icons who are getting fabulously wealthy by using their positions of corporate trust to cheat their own investors. The shaming of these well-dressed muggers should include total confiscation of the money they have stolen, and lengthy involuntary confinement under Spartan conditions in high security facilities graciously provided by the taxpayers.

Greed, for want of a better term, works. And it works even better when coupled with a willingness to steal from people who trust you. That is the current de facto governing philosophy of Corporate America.

The prevailing attitude on the part of the financial establishment is that what Enron and WorldCom did was terribly wrong…because they got caught. Despite the recent accounting scandals and subsequent indignant demands for reform, the crime spree on Wall Street continues unabated. American Big Business has repeatedly proven that it will lie and cheat and steal from investors until someone forces it to stop. The reform legislation that has just been passed by Congress is a small step forward, but only if its provisions are vigorously enforced.

There is just one person in a position of authority who can set things right. He can demand corporate adherence to ethical accounting standards. He can initiate investigations to expose corporate criminality. He can have his subordinates prosecute the bandits who are breaking existing laws. He can advocate that the crooks be severely punished in both criminal and civil courts. He can insist on tougher new laws so that the majority of corporate robbers who currently hide behind legal technicalities will also be held to account. By providing these significant deterrents to further corruption, he can put an end to the epidemic of business fraud that has destroyed the finances and ruined the lives of so many innocent investors.

Alas, he is George W. Bush, and he would have neither a personal fortune nor a political career without the patronage of Corporate America. The pirates who are stealing from their shareholders have financed each of his campaigns. This year, Bush has set new records for fundraising by soliciting huge amounts of money from the liars and cheats and thieves he is now supposed to bring to justice.

He owes them everything.

Caveat Emptor.

Wall Street Treachery Series

Podvin, the Series

 


Last changed: December 13, 2009